Rice smuggling is just a symptom

Many years ago, I remember a situation we had with diesel supply. We had price control on petroleum products and the price of diesel was kept low by increasing the price of gasoline. The cross subsidy between the petroleum products was devised because diesel was supposed to be the fuel with the most impact on the masa. Policy makers were focused on the domestic situation when this so-called socialized pricing policy for diesel was adopted.

There was a problem however. Markets do not respect edicts of governments and even national boundaries. We saw a lot of local diesel being smuggled out of the country. The smugglers bought low priced diesel from Philippine sources and sold them to neighboring countries where the prices are a lot higher. It helped the smugglers that we do not have a navy or coast guard good enough to stop them. Nor did we have a bureaucracy immune to bribes when smugglers are caught.

Related to that situation, we also saw gasoline being smuggled into the country because the price of gasoline here was higher than in our neighbors. What was happening to diesel and gasoline is not surprising. It happens every time politicians tinker with economic laws… as in, repealing the law of supply and demand.

The impact of the martial law edict of socialized pricing on our subsidy revolving fund called the Oil Price Stabilization Fund or OPSF became serious enough for the policy makers at the energy ministry to worry. But nothing could be done for so long as the political leaders insist on trying to overrule the economic law of supply and demand through an Executive Order.

But governments are not the only ones who can cause market aberrations. Cartels do it all the time, but intentionally. That is probably what is happening with rice. Traders see an opportunity and they exploit it, and to hell with the consequences so long as it is profitable for them.

These thoughts came to me as I read a report about how the Customs bureau discovered an unusual attempt to smuggle rice into the country by mislabeling the shipment as mung beans. Customs Chief Lito Alvarez said the mung beans “magically” morphed into white rice after clearing Customs. And the Customs Chief can talk with authority about magic... and not just with golf score cards.

The BoC commissioner also said the case covered only four import entry declarations but they suspect it had been going on for years. The shipment arrived on June 17 this year and was released the following day without paying duties or taxes. “If correctly declared, the BoC should have collected over P10 million representing duties and taxes but since the subject shipments were misdeclared and were fraudulently imported, the shipment worth over P38 million should have been forfeited in favor of the government.”

The loss of customs duties is just one aspect of the problem arising from this smuggling case. The other, and perhaps more important consideration, is the impact of a flood of smuggled rice on our local farmers and eventually on our efforts to encourage farming for our national food security.

This ties in too to something I read about an observation made by an NFA official to the effect that it is difficult to make estimates of total country rice inventory because there is the element of rampant rice smuggling. As in the case of diesel fuel cited earlier, smuggling rice into the country is viable only because domestic prices are artificially high... by action (or inaction) of government or by action of a private sector cartel. The smugglers figure they can buy rice cheap from Vietnam or Thailand and quickly turn around by undercutting prevailing rice prices by selling low.

But why is our domestic price of rice high? I suspect the domestic price of rice is less influenced by market forces and more by cartel actions. After all those billions of pesos in subsidy to NFA, government is unable to influence what happens in the market. Rice smuggling is likely just the symptom of something more basic that the government must address.

The most basic problem is of course, our inability to grow enough rice for domestic consumption. Throw in there the problems of rice farmers: access to technology, farming inputs, financing and maybe, even the matter of how we have failed at land reform. All these have made rice farming a thankless, backbreaking chore that keeps a large part of our population mired in poverty.

Then there is the problem of a rice cartel and how it has controlled rice prices through the years a lot better than NFA and its predecessor agencies (NGA, RCA, etc). The cartel uses market forces they artificially influence to raise and depress prices depending on their need for the moment. This cartel of pretty influential rice traders has co-opted government officials through the years to the detriment of the national interest.

The Secretary of Agriculture can worry about the concerns of the rice farmers. But maybe, dealing with this cartel is the job for the new NFA boss, Lito Banayo. We haven’t had a capable and street smart NFA director in a long while who can outmaneuver the rice cartel. Hopefully, we have one now.

The job of this new administration is to show this cartel who is boss. There are many ways of doing this outside of the use of brute police power. Hopefully, P-Noy’s boys are savvy enough to use market forces to teach this cartel a good lesson. But I am not holding my breath.

In any case, someone asked Lito Banayo his reaction to my column last Monday. Lito said that “it’s precisely because I want to chart a better direction for the NFA that I asked private sector specialists in commodities and finance to help me conduct a systems and management audit, and assist us in grappling with the problems of the agency, which have been compounded by GMA’s politics of survival. I tapped Jess Posadas, for 20 years with San Miguel, and retired in 1997 as its VP for purchasing, to head the systems audit. The NBI is supporting us on the aspect of rice smuggling, among other irregularities and illegal interventions in the rice trade.”

Mr Banayo also explained that “I want to properly define NFA’s and therefore, government’s role, in the supply of rice vis-a-vis the subsidy and support for farmers, with the help of the Department of Agriculture’s production interventions. I said I will not import for the rest of 2010, and will not allow others to import until after December this year. There’s enough for the rest of the year.  You see, we are allowed by the NFA Council to allow importations up to 3.2 million tons. Total imports have reached 2.4, so I still have 800,000 tons that may be sourced outside the country.”

I have my hopes up on Mr. Banayo. I got a very positive feedback from a senior DA official on Mr. Banayo’s effect on NFA staff. The official said some orders from the past DA leadership were ignored by the staff, presumably because it won’t be personally profitable to them. But Mr. Banayo has instilled fear and discipline that would hopefully go beyond the first hundred days of this administration.

It is up to Banayo and the Secretary of Agriculture to make sure we have sufficient rice at the right price for both producers and consumers. That ability to be on top of the rice situation will only be possible if they are able to control all forces that impact on the availability and price of rice. They won’t have control unless they neutralize the cartel and rid their organizations of corrupt officials who do not share the public service orientation of P-Noy.

That’s a tough job. Accomplishing it eluded past administrations. Hopefully, this time it is different.

Drunken talk

This one’s from Atty. Sonny Pulgar.

A somewhat drunk man feels a bald man’s head and says, “Say, your head feels just like my wife’s ass.”

The bald man feels his own head and says with a grin, “You know, you’re right!”

Boo Chanco’s e-mail address is [email protected]